Winter 2015

Tag Archives: United States

The decision of wether to keep the penny as a unit of American currency is becoming an increasingly hot topic. The debate has even been brought before congress, twice, but neither of the bills, advocating the elimination of the penny, were approved. Even President Obama has stated his willingness to abolish the penny on February 15th, 2013. Saying,”Anytime we are spending money on something people do not use, its something that we should change.”

The first argument against the penny is that pennies actually cost more to make than they are worth. According to the US mint’s 2013 annual report, every penny cost 1.8 cents to make. Granted, the total cost of minting pennies was only $58 million last year, less than one-tenth of a percent of total federal spending, but groups like Citizens to Retire the U.S. Penny have long been making the economic case for getting rid of the penny. Even the U.S. military has already decided they’re essentially useless with Army and Air Force Exchange Service stores on bases rounding all cash purchases up or down to the nearest nickel.

When looking at the costs and benefits in aggregated terms, there have been studies that have shown that the penny results in an annual loss of $900 million in the US economy each year. How did they come by this number? The economist Robert Whaples stated that every cash transaction that involves pennies takes two extra seconds because people are fishing them out of their purses and pockets. He and others have stated that aggregated, these two second delays add up to a loss of productivity and opportunity cost of use worth $900 million to $1 billion dollars. He also argues that eliminating the penny could make people keen on using $1 coins, which would save the US an additional $500 million a year because coins are more durable than bills which are torn and lost easily.

The second most compelling argument is that penny’s these days have limited utility, not being accepted at many parking meters or vending machines. Economist Greg Mankiw says that “The purpose of the monetary system is to facilitate exchange, but… the penny no longer serves that purpose.” There has never been a coin in circulation in the US worth as little as a penny is today.

Taking into account the arguments of those in support of abolishing the penny, which tend to focus on statistics of aggregated costs, it will not happen. Popular support for the penny is still high, at 67%. In addition, Keynesian idea of “menu costs” is something that has not been researched fully. If the abolitionists want the penny to be taken down, they will have to approach it from the stand point that we should limit all of our physical currency monetary transactions and switch to e-currency.

In light of today’s budget announcement from the White House, I have decided to explore one of the main focuses of the $478 trillion spending plan that the President has come up with to revive the economy, infrastructure spending.

(www.pwc.com/cpi-outlook2025). The study also predicts that Western Europe infrastructure spending will not return to pre-crisis levels until 2018, as Asia’s has been growing this entire time.

“Developing economies, most notably China and other parts of Asia, account for nearly half of all infrastructure spending, up more than 10% from 2006” (www.pwc.com/cpi-outlook2025)

How will China’s success in the race for infrastructure growth will contribute to its economic growth compared to Europe’s?

While China’s economy had been growing in double digits over the last 20 years, growth has slowed recently. This growth is still at a respectable annual growth rate of 7%. China’s economy is maturing and beginning to lose its cost-competitive advantage to other lower cost countries. As this happens, China will need to make strategic investments to sustain its growth. Investments in infrastructure can serve this growth need. Infrastructure investments immediately create jobs in construction and related industries. Infrastructure investments also provide opportunities for longer term, more sustainable growth and development.

China should continue to make SMART infrastructure investments, especially in high speed rail, ports and airports and wireless high-speed telecommunications to continue to open markets within China and to provide a better quality of life for its citizens.

Virginia Lau discusses Chinese high speed rail in her article “Record breaker: China’s incredible north-south high-speed train line plan” for CNN as the world’s longest high-speed rail line was just proposed to run from “Inner Mongolia’s Baotou city and running through southern Shaanxi, Hubei, Hunan, Guangxi and Guangdong, its final stop would be in Haikou city on Hainan Island, China’s southernmost province” (http://www.cnn.com/2015/01/08/travel/china-high-speed-north-south-rail/). Additionally, this project will connect rural provinces with urban areas such as Beijing. This will promote growth by providing sustainable job opportunities for those in rural areas, as discussed above.

The United States prides itself on the value it places on higher education. The nation was recently ranked the fifth most educated country in the world, according to data collected by the Organization for Economic Co-operation and Development, using percentage of the population that has attained a tertiary education as their metric. However, the data presents a more troubling story than it would appear at first glance. When the OECD set its age range for the rankings, it was surveying the US population that fell between the ages of 25 and 64, yielding the 42% tertiary education attainment rate that places the United States so high in global education rankings. However, if the age range is tightened to individuals between the ages of 25 and 34, which OECD uses to survey the “younger adults” population group, the US yields the same rate, 42%, and falls in the rankings all the way down to 14th. The message here is clear: the United States may still be a leader in education, but it won’t be for long, as the nation is falling behind in the brains race.

Perhaps one of the biggest barriers to the United States keeping up with other leading nations in education its populace is the rapidly rising cost of higher education. As shown in this analysis conducted by Bloomberg with data from the Bureau of Labor Statistics, the cost of college tuition in the United States has risen by a jaw-dropping 1,225% in the last 36 years – compared to a 279% increase in the consumer price index. Higher education has been by far the most rapidly rising expense to American consumers in the past several decades, and it has left a massive burden on the shoulders of our country’s young population.

While European countries are pumping out higher education at little to no cost to their students, thanks to state-subsidized public universities, American students are assuming student loans that will cripple their ability to contribute to the economy for years to come. Mitchell E. Davis, the President of Purdue University, presents some more worrisome statistics in the Wall Street Journal, such as the fact that educational debt has become the second largest debt category for the American public, after home mortgages, and the fact that 25% to 40% of student borrowers report postponing major purchases such as homes and cars. The most shocking statistic, for me at least, is this one: 45% of graduates age 24 and below are currently living at home or with some sort of family member. Not only is this disheartening as a soon-to-be graduate, but it is troubling as a US citizen. Young Americans are currently dragging down the US economy by avoiding major spending and by starting families later and later, they are dampening potential for economic growth. The issue will continue to worsen as the pool of Americans with college debt grows, and will not be resolved until measures are taken to reform the higher education system and make learning more available to all citizens.

Dollar has risen in a steady rate in these days. Many experts hold a positive view that dollar will keep mighty in the near future at least. US citizens are more confident when they found the money in their account becomes more and more valued. However, currency is always a thing with both pros and cons.

“Avon Products Inc., which books 88% of its sales outside the U.S., can’t raise prices on its makeup and wrinkle creams fast enough to offset the dollar’s rise against the Brazilian real and other currencies. The suddenly stiffer price of a U.S. holiday means fewer foreign travelers booking hotels through Expedia Inc. ’s travel websites. European rivals to consumer-products makers like Procter & Gamble Co. now have an advantage in price wars for market share in the U.S. And utilities and steelmakers in Europe and Asia may buy less U.S. coal to fire their furnaces.”(http://www.wsj.com/articles/dollars-rise-squeezes-u-s-firms-1421800346) This might be a example with sorts of extreme but what cannot be denied is that some US companies do get hurt by dollar’s rise. US has most GDP for dozens of years but it also has trade deficit for a long time, which is always been considered as a negative signal for development. “The US imports commodities and merchandise from over 240 distinct geographic markets. Inbound shipments may be headed for US consumer markets or moving along global supply lines that crisscross national borders. The US is the world’s third-ranked (after the EU and China) exporter/importer of intermediate goods. By value, the US takes the largest share of global imports overall.”(http://www.datamyne.com/us-import-data/?utm_source=google&utm_medium=cpc&utm_term=us+imports&utm_content=US+Imports&utm_campaign=Datamyne-+US+Import/Export+Trade+Data&gclid=CKnys8umpMMCFYRFaQodY08AWQ)If we just put our view on import, then we should be happy for the US importers. Consumers can buy thousands of stuffs with a relatively lower price than before. And firms who depend a lot on importing goods can lower their marginal cost to be more competitive. But things are not so optimistic for us if we perceive this issue in another perspective—export.

Basically, export is the essential fuel to push the economy moving forward, especially for a big country with a huge amount of population. China is an exemplary country who made a surge of economy by exporting manufactures, including apparels, toys, food and so on. Though we have to say that US really did a good job to keep a high GDP (may be attributed by high level of income), with trade deficit, expanding export is still another benefit if it is not indispensable, to say the least. Therefore, US should be eager to find an eclectic point to regulate its currency for further progress of the economy.

It’s no well kept secret that the sharp decline in oil prices is having sweeping effects across the global economy, but the ramifications of this dip have varied dramatically country to country. The dramatic price shock (oil hit a five-and-a-half-year low Friday after falling below $50 a barrel, per Bloomberg) poses a major threat to petroleum-dependent countries like Venezuela and Russia, and to the titans that are the world’s energy companies. For now though, things are looking pretty good for the U.S. Although the Wall Street Journal projects energy companies to report a 19.1% fall in fourth quarter earnings for 2014, the Dow and the S&P have recently set record highs and December’s job report has lent confidence to the U.S. economy. The hit to the energy industry is partially offset by businesses that have benefitted from lower prices: those dependent on transportation, and those dependent on consumer spending, which should rise as households save more on gas.

The impact of oil’s plunge isn’t merely economic though – petroleum has the power to reshape the world’s political landscape, as we’ve seen so many times in the past. In this case, things seem to be shifting in the favor of the U.S., with weak oil prices providing, as David Goldwyn puts it in the Washington Post, “great serendipitous leverage” for the U.S. over countries it has been at odds with on political issues. The U.S. has been applying economic pressure to both Russia and Iran in the form of sanctions in an effort to impose policy resolutions regarding the former’s involvement in Ukrainian separatist movements and the latter’s nuclear program. Falling oil prices work in favor of the U.S. by putting further pressure on these two nations, which rely heavily on petroleum exports. Another U.S. foe that supports itself on oil sales is the Islamic State, which will see a constriction on its revenue stream that will hopefully hit the organization hard.

The current market for oil could be quite beneficial for the U.S. in the long term as well, as investors may begin to see more merit in renewable energy sources, helping the country catch up to nations leading the way in green energy. Recently, one of the biggest backers of renewables has been Google, which just invested $188 million to build Utah’s biggest solar plant, and has invested $1.5 billion total in renewable energy, according to the Wall Street Journal. It’s not just solar energy that’s been seeing recent investing activity though; the Journal also reported a $150 million acquisition by uranium producer Energy Fuels Inc. If current oil prices are here to stay, we may be seeing the beginning of a long-term flow of capital away from petroleum investments and towards renewable energies that look more and more appealing every day.